Stocks

Despite a Partial Government Shutdown, Stocks Rally…

Posted on by George Mahfouz

No matter what has been thrown at this bull market over the past few years, nothing seemingly can slow it down. After the key indices finished the month of September with unlikely gains, stocks continued their upward trajectory today even though Congress couldn’t agree on a short term budget deal to keep our government fully operating.

For the first day of October, the Dow Jones Industrial Average (chart) finished up 62.03 points, the Nasdaq (chart) +46.50 points, the S&P 500 (chart) +13.45 points and the small-cap Russell 2000 (chart) closed the day up 13.64 points. Pundits are speculating that with the government in a partial shutdown, Congress will now have to address the debt ceiling and budget at the same time which a likely compromise will come forward on both issues, hence, bullish for stocks. Not sure if I fully agree with that thesis. Furthermore, the bulls make yet another case that by having this budget and possible debt ceiling impasse, this will keep the Federal Reserve in full accommodative policy mode. Now this in my opinion would be a more bullish thesis. However, lets not forget we have now entered into the fourth and final quarter of the year and third quarter earnings reporting season is on its way.

Needless to say, the markets have a ton to digest over the coming weeks including Q3 earnings reporting season and I am expecting volatility to continue to increase. From a technical standpoint, the Nasdaq (chart) and the small-cap Russell 2000 (chart) stunningly hit new 52-week highs today and continue to outperform the Dow Jones Industrials (chart) and the S&P 500 (chart). The Dow and S&P did bounce off of key support levels yesterday and have resumed their uptrends, at least for now. In addition, both the tech-heavy Nasdaq (chart) and small-cap Russell 2000 (chart) are once again approaching overbought territory heading right into earnings reporting season, which could be of interest to the bear camp.

As volatility increases, one strategy that can potentially bode well is to sell option premium on select indexes or stocks in order to capitalize on the increased vol. This strategy is not for the novice and one should consult with a certified financial consultant before implementing any strategy, especially options strategies. But for the more advanced investor or trader, this type of environment is almost perfect to participate in a “selling option premium” program. Option premium is essentially income generated by an investor who sells premium to another party and hopes to keep the entire premium without having the option exercised. Let’s look at one example of a “selling premium, covered call strategy”. Let’s assume you own 1000 shares of Facebook (NasdaqGS: FB) at $50 per share. You can choose to “sell” a.k.a.”write” a covered call option on the Facebook shares you own. If you take the monthly October $52.50 calls that are currently trading for $1.20 and sell/write them against your position, you would take in $1,200.00 less transactions costs. This is the premium you would receive for writing/selling this covered call. If Facebook closes below $52.50 on expiration day you keep the entire premium as well as your 1000 shares. If Facebook closes above $52.50 on expiration day you still keep the entire premium earned, however, your 1000 shares of Facebook would be called away at $52.50 because you sold your rights to the stock you own to another party for $52.50. If this is the case, you would be a not only be benefiting from the options premium income, but also a stock appreciation outcome for in this example the initial cost basis for the Facebook position is $50.00 per share. So you would gain an additional $2.50 per share in profit. Please note that a covered call strategy is typically a bullish strategy and again this is just one example of how “selling options premium” can work. In closing, this is not a recommendation just an illustration on how an investor or trader can potentially benefit with option premiums. Please remember it’s always best to consult with a certified financial planner(s) before implementing any investment strategy.

Good luck to all 🙂

~George

 

Super week for stocks!

Posted on by George Mahfouz

Stocks rallied for the second straight week as the key indices have now just about recaptured all of their losses incurred in August. The Dow Jones Industrial Average (chart) had one of its best weekly showings of the year gaining over 3%, the Nasdaq (chart) closed the week up 1.7%, the S&P 500 (chart) +1.98% and the small-cap Russell 2000 (chart) finished the week up 2.37%. Over the past couple of years, time and time again whenever equities as a whole have had a five percent pullback or so, such as what we experienced in August, a significant rally ensues and the bull market seemingly resumes. They say markets are forward looking indicators, well we must be in store for quite the year-end closeout, or are we?

This upcoming week the FOMC meeting will take center stage. The debate is on as to whether or not the Fed will start reducing its bond and mortgage back securities purchases and what effect this could have on the markets. My feelings are that there is still enough tepid economic data coming in for the Fed not to begin to taper. However, there are plenty of pundits out there that argue that the economy is beginning to show pockets of strength which could give the Fed the green light to begin with a small reduction with their future purchases. Either way, the technicals are now on their way to overbought territory, and interest rates are continuing to rise with the 10-year treasury note (chart) closing in on 3%. This could be a one-two punch to once again slow down and even potentially reverse this most recent rally.

That said, if you are a technical trader, this is an almost perfect environment to trade in. Support levels are continuing to be honored as well as resistance marks. We now find ourselves butting up against the upper end of the trading range in the S&P 500 (chart) and we could very well be headed back to support levels which in this case would be the 1630 zone on the S&P (chart). If the markets embrace the Fed’s action or lack thereof, a breakout above the all time high of 1709 of this key index could very well be in the cards.

Good luck to all and have a great week 🙂

~George

 

A pause or a preview?

Posted on by George Mahfouz

The key indices had one of their worst performing weeks of the year. For the week, the Dow Jones Industrial Average (chart) fell 2.23%, the Nasdaq (chart) pulled back 1.57%, the S&P 500 (chart) -2.1% and the small-cap Russell 2000 (chart) closed the week down 2.3%. It’s important to note that other than the Dow Jones Industrial Average (chart), the aforementioned other key indexes remained at or above their 50-day moving averages. Stocks reacted to rising interest rates and weak retail sales reported by several retailers including Walmart (NYSE: WMT) which missed on thier earnings as well as providing a somber outlook. Furthermore, bellwether Cisco Systems (NasdaqGS: CSCO) also issued cautious forward guidance during their post earnings release conference call on Wednesday.

So the question now becomes is this a blip on the radar, or a preview of things to come? All year long stocks have been propped up by the most accommodative Fed in history. I also have been writing about the need for top-line growth out of corporate America in order for this bull market to continue. To that point, I have been simply wrong from the standpoint that central banks from around the world continue to pour liquidity into the system and continue to keep interest at or near zero. This policy has taken the emphasis off of how well corporate earnings are actually doing. As Q2 earnings reporting season begins to wind down, there is growing evidence of tepid growth at best, especially in the retail space. Furthermore, the companies that have beat estimates have done so by running a tighter ship and getting more productivity from their current workforce.

Personally, I would like to see how this corrective action plays out over the next few weeks before I am comfortable deploying any long or short strategies in the marketplace. To that end, let’s not forget we are smack in the middle of the dog days of summer, and with most money managers at the beach, volume tends to be very light. Good luck to all.

Have a great weekend 🙂

~George

Record breaking July!

Posted on by George Mahfouz

The month of July served up all time highs as Q2 earnings reporting season begins to wind down. For the month, the Dow Jones Industrial Average (chart) closed up 3.50%, the tech-heavy Nasdaq (chart) gained a whopping 6.8%, the S&P 500 (chart) +4.38% and the small-cap Russell 2000 (chart) closed the month up 5.6%. The rally in stocks continue thanks to favorable corporate earnings for the most part, and the Federal Reserve keeping its commitment to do whatever it takes until the economy can stand on its own two feet. Yesterday, after the Federal Reserve’s 2-day policy meeting ended, the central bank reiterated that it would continue its $85 billion per month bond buying program and keep interest rates near zero to help support and strengthen the economy.

That said, August begins with quite the test as all eyes will be on tomorrow’s  jobs report. The July unemployment report should be the most scrutinized report of the year as the Federal Reserve has been on the record recently signaling as to when they may start pulling back on its monthly bond purchases. A stronger than expected report may compel the Fed to begin tapering as early as September. However, if job growth continues to be modest, then I think its safe to say the accommodative policies of the Fed will continue into the foreseeable future. So you may ask what does this all mean to the market? This may become the case where good news in the labor market may be bad news for stocks. I know it seems counterintuitive, however, just the notion in late May that the Fed was considering tapering sooner than later sent the markets down five percent in a matter of a couple of weeks. I think everyone from the hedge fund community to mutual funds to institutional investors and even the individual retail investor have been so reliant on this accommodative Fed, that once the tapering actually begins, we may just see the stock market correction the bears have been anticipating all year long.

Technically speaking, although the markets are seemingly overbought, the key indices are not at extreme overbought conditions, just yet. Let’s take a look at the relative strength index (RSI) on the Dow Jones Industrial Average (chart), the Nasdaq (chart), the S&P 500 (chart) and the Russell 2000 (chart). As you can see, these indexes are trading below the 70 value level which is the level most market technicians consider an extreme level. I personally consider the 75-80 value level as extreme, especially in today’s market environment. That said, it appears there has been some consolidation going on over the past couple of weeks with the aforementioned indexes which have been trading in a pretty tight range.  Just maybe tomorrow’s unemployment report will be the catalyst for stocks to breakout of its recent trading range and begin a new trend. I view a breakdown of the 1650 zone in the S&P 500 (chart) as bearish. However, should the S&P 500 (chart) break and close above 1700 in a meaningful way, we may just see the extreme overbought conditions come into the marketplace as mentioned above. Good luck to all and I wish you all a very profitable month.

All the best 🙂

~George

Dow record in sight…

Posted on by George Mahfouz

Stocks continue to head north this week with the Dow Jones Industrial Average (chart) flirting with an all time high. For the week, the Dow (chart) closed up 0.64%  just 74 points away from notching a record, the Nasdaq (chart) finished the week up 0.25%, the S&P 500 (chart) +0.17% and the small-cap Russell 2000 (chart) closed the week out basically flat. Looking at the year to date performances of these key indices and you will see eye-popping gains of 7.52%, 4.98%, 6.45% and 7.70% respectively.

This wasn’t the case on Monday when the markets nerves were tested with fears of instability out of Italy and the ongoing sequester uncertainty here at home. This sent stocks spiraling with the Dow shredding over 200 points. However, true to its form, stocks regained their footing on Tuesday and throughout the rest of the week once again demonstrating how resilient equities are in this Fed friendly environment. Even Gold bounced off of its recent lows to close at $1572.30 a troy ounce, although still trending downward.

Looking ahead to next week, I am cautiously optimistic that we could see a record on the Dow with the caveat of headline risks out of Washington. If the sequester issue does not get some type of formidable resolution out of Congress, we will most likely see consumer confidence rattled and market confidence challenged. Chances are neither side of the aisle wants to be held responsible for the looming automatic spending cuts which in turn would be a serious blow to our fragile economy. Nonetheless, it would be wise to tread these markets carefully and make sure to always consider using protective stops in your portfolio. Good luck to all.

Have a great weekend and profitable March 🙂

~George

Flat week…

Posted on by George Mahfouz

The four key indices finished the week basically unchanged, however, after the run stocks have had so far this year, the bulls will take it. For the week, the Dow Jones Industrial Average (chart) finished lower by 0.08%, the Nasdaq (chart) by -0.06%, the S&P 500 (chart) and the Russell 2000 (chart) actually ticked up on the week by 0.12% and 1.04% respectively.

The bears must be scratching their heads and asking; “Where is the pullback or 5-10% correction?” Without question the market has been churning and consolidating for the past several trading sessions and if  you have been short, or have been putting on new short positions, there may be a need for concern. My expectations have been calling for some type of pullback which in fact would be healthy for stocks. However, one thing I have learned over the years is you cannot fight the tape or for that matter, the fed. As long as you have the Federal Reserve commiting and deploying an exorbitant amount of resources and liquidity to the markets, you will most likely have a bid underneath most equities.

Technically speaking, the major indexes remain in overbought territory and when there is a pullback or correction in the averages, I would expect it will be met with willing and able buyers. Good luck to all.

The markets are closed on Monday for President’s Day so enjoy the extended holiday weekend 🙂

~George Mahfouz

It’s parabolic!

Posted on by George Mahfouz

Stocks remain on fire in January as most of the major averages are hitting multi-year highs, and in some instances all time highs! For the week, the Dow Jones Industrial Average (chart) closed up 1.8%, the Nasdaq (chart) +0.48%, the S&P 500 (chart) +1.14% and the small-cap Russell 2000 (chart) finished the week higher by 1.39% and closing at an all time high. Once the S&P 500 was able to breakout and remain above the 1475 level, which had been a major resistance level, the money that had been sitting on the sidelines seemingly went to work. Also there has been a slow rotation out of bond funds and into stocks.

One would thing that a pullback of some sort is in the cards for equities. However, with earnings reporting season coming in better than expected so far, and the debt ceiling issue being pushed out, we may very well continue to see this upward trajectory for stocks at least in the short term. There could be one catalyst that may give the market a pause and that is next weeks jobs report. If the employment picture continues to remain weak, I would think that this could be a reason for stocks to take a breather.

In addition to the January jobs report released next week, we will also get earnings reports out of Caterpillar (NYSE: CAT), Yahoo (NasdaqGS: YHOO), Ford (NYSE: F), Amazon (Nasdaq: AMZN), Facebook (NasdaqGS: FB), Mastercard (NYSE: MA) and ExxonMobil (NYSE: XOM) just to name a few. Good luck to all.

Have a great weekend 🙂

~George

 

Post election drubbing!

Posted on by George Mahfouz

Stocks were slammed this week after the results of the 2012 presidential and congressional elections. In fact, it was the worst performing week for equities in months. The Dow Jones Industrial Average (chart) lost 2.1%. The Nasdaq (chart) -2.6%, the S&P 500 (chart) -2.4% and the small-cap Russell 2000 (chart) finished the week lower by 2.4%. With the election producing essentially no change in Washington, fears of the fiscal cliff playing out and much higher taxes took center stage and sent the markets spiriling. Furthermore, all of these bellwether indexes are now trading below their respective 200-day moving averages. For most market technicians and certain institutional investors, the 200-day moving average is a key technical metric that is relied upon as to the future direction of stocks or indexes. Personally, I would need to see several days of trading and closing below the line in order for me to completely change my view of where stocks may be headed.

Now that the election is behind us, we can all now begin to focus on not only what Washington will or will not do, but what really is happening behind the scenes of the economy and corporate America. Q3 earnings reporting season is winding down and as expected corporate profits have been affected by the slowing global economy. Between now and year end, I will be paying much closer attention to the economic numbers here and abroad, and even closer attention to the underlying technicals of the markets, which are beginning to show some cracks. As previously stated, in my view a couple of days of the indexes trading below the 200-day does not concern me too much, however, if we see a repeat performance next week with stocks continuing to decline, we very well may be in for a meaningful reversal that the bears have been waiting on. Good luck to all.

Have a great weekend 🙂

~George

A positive week for stocks, next up Q3 earnings…

Posted on by George Mahfouz

The market posted its first weekly gain in almost a month, this right before earnings reporting season begins. For the week the Dow Jones Industrial Average (chart) finished up 1.29%, the Nasdaq (chart) +0.64%, the S&P 500 (chart) +1.41%, and the small-cap Russell 2000 (chart) closed the week up 0.65%.

Third quarter earnings reporting season will be the highlight next week with earnings reports coming out of Alcoa (NYSE: AA) Yum Brands (NYSE: YUM) and JPMorgan Chase & Co (NYSE: JPM), just to name a few. Most analysts have ratcheted down their earnings forecasts due to the tepid pace of global growth and the number of companies that have pre-announced to the downside. The big question now is, are these adjustments already priced into equities and indexes? My feelings are that if there are any big surprises to the downside and stocks sell-off, that fund managers and institutional buyers are sitting on the sidelines ready to act. We cannot forget the position of the Fed which essentially gives this class of investors the green light to deploy capital into the markets. Of course there are no guarantees that this will be the mandate, however, odds are that any significant sell-off due to earnings reporting season would be met with support. Good luck to all.

Have a great weekend 🙂

~George  

Just like August, September produces unlikely gains…

Posted on by George Mahfouz

Although stocks were mostly lower on the week, the month of September produced rare gains for the benchmark indexes. For the month of September, the Dow Jones Industrial Average (chart) gained 2.65%, the Nasdaq (chart) +1.61%, the S&P 500 (chart) +2.42% and the small-cap Russell 2000 (chart) closed the month up 2.12%. This capped a very impressive third quarter for equities with all of these key indices advancing sharply higher.

So now the encore! What promises to be an event driven final stretch of the year, investors can look forward to Q3 earnings reporting season in October and of course the Presidential and congressional elections in November. Not to mention the ongoing saga in Europe, the seemingly everlasting middle east crisis, and whether or not our country will face the “fiscal cliff” outcome which could spin our economy into a recession?

So as you can see stocks and bonds are certainly exposed to an enormous amount of uncertainty in the final quarter of the year. Typically when markets are in such a quandary, much higher volatility usually ensues. In any market environment and  especially the one we are heading into, it is always best to use protective stops and or protection in the form of puts if you have a long portfolio. Furthermore, it is always a good idea to consult with a professional investment advisor before implementing any type of strategy. Good luck to all.

Have a great weekend 🙂

~George